Extraordinary times call for extraordinary leadership in OPEC+ — and Saudi Arabia stepped up

Cornelia Meyer

The coronavirus (COVID-19) pandemic has taught us how quickly things can change. In the oil industry, things were looking so good in mid-December when the Joint Ministerial Monitoring Committee of OPEC+ (a group of OPEC countries and 10 non-OPEC allies) postponed its meeting until the beginning of January amid rising oil prices and high hopes for the rollout of COVID-19 vaccines.

The oil price kept rising, with Brent well above $50 a barrel and WTI also flirting with that benchmark. Alas, once again the virus proved to have a mind of its own, as two highly infectious mutated variants emerged in the UK and in South Africa. We all know what happened next: More lockdowns and restrictions. The rising numbers of infections were the final nail in the coffin for any further easing of production cuts by OPEC+, which some countries had been pushing for.

In December, the group had decided to put an additional 500,000 barrels per day (bpd) on the market in January. They also agreed to increase the frequency of ministerial meetings to a monthly schedule, allowing them to tweak output more or less in real time.

This month’s meeting was polarized, with de facto leader Saudi Arabia wanting to keep production levels constant, and Russia and Kazakhstan insisting that production by the group should be increased by 500,000 bpd in February, as was agreed in December. The meeting was fractious and broke up on Monday night without reaching a decision — sending the price of WTI down below $48 a barrel. Diplomacy eventually won the day as Saudi Arabia offered to make additional voluntary cuts of 1 million bpd for the months of February and March. This more than compensates for the combined prorated increase during that time by Russia and Kazakhstan of 75,000 barrels per day.

Saudi Arabia demonstrated real leadership — or, in the words of the country’s Energy Minister Prince Abdul Aziz bin Salman, its role as “the guardian of the industry”
The decision was very well received by the market, sending Brent to a 10-month high of $53.70 a barrel, and WTI piercing the $50-a-barrel mark on Tuesday night.

Saudi Arabia demonstrated real leadership — or, in the words of the country’s Energy Minister Prince Abdul Aziz bin Salman, its role as “the guardian of the industry.” The Kingdom’s actions are important because they will allow oil inventories to draw at an accelerated pace.

OPEC Secretary-General Mohammed Barkindo warned on Sunday that stocks in Organization for Economic Cooperation and Development member nations were still 163 million barrels above their five-year average. This is significant because OPEC+ uses this data point to gauge the state of the oil market.

Russia has for some time been eager to put more crude on the market. Its oil industry is sitting on excess capacity that it has been pushing to use, which is a domestic political reality.
Compromise does not come easily when you have 23 countries with divergent circumstances, interests and views. In the end, however, caution won the day — as demonstrated by the Saudi leadership.

Prince Abdul Aziz made an excellent point on Monday when he warned that complacency is dangerous, given new lockdowns are still hampering demand and affecting the transportation sector in particular. He reminded group members of the need for cohesion and compliance because of the dangers that lurk if too much oil is allowed to hit the market too quickly.

While compliance with the production cuts among OPEC+ members is now very good, at above 100 percent, Iraq, Nigeria and some countries were not let off the hook for previous overproduction and were reminded they must compensate for this by the end of the first quarter.

The past few weeks have shown how quickly sentiment can change from optimism about vaccines to pessimism about fresh lockdowns. The chosen trajectory of OPEC+ attempts to steadily and slowly ease production cuts while increasing the frequency of meetings so that adjustments can be made in real time in reaction to market developments.

Saudi Arabia’s voluntary cuts for the remainder of the first quarter (Q1) are an act of courage that will do a lot to help rebalance the oil market. It comes at a time when the virus has not yet been brought under control, and so it is important because we are not yet out of the woods, not by a long shot.

That being said, while Q1 will be challenging, one should expect 2021 to eventually become a good year for oil, as it will for many other commodities. Barkindo expects demand to rise by 5.9 million bpd this year, reaching 95.9 million bpd — which is still below 2019 levels and 6 million bpd below where OPEC anticipated 2021 demand, before the pandemic intervened.
While oil will recover alongside the wider global economy in 2021, there will be bumps along the road, as the recent surge of COVID-19 infections in the US, the UK and elsewhere prove.

Vaccines are being approved and will be rolled out in the months ahead. One should, however, be realistic about the logistical challenges of implementing mass vaccination programs at national and international levels. Equitable levels of vaccination at the international level will be particularly important for the transportation, travel, hospitality and leisure sectors, all of which are drivers of oil demand.

The current decision by OPEC+ is a reflection that the next few months are not going to be easy for many countries, which will inevitably take its toll on demand for oil.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources